“For example, both Reg BI and the fiduciary duty of investment advisors require that the firm act in the best interest of the retail customer or investor. The main difference is when each of the obligations will apply. The duties required under Reg BI are tied to each recommendation a broker-dealer makes, whereas an advisor’s fiduciary duty applies to the ongoing relationship with a client.”
Neither Reg BI nor advisors’ fiduciary standards explicitly prohibit particular conflicts of interest, she added.
So how will the proposed Reg BI be different from the existing suitability standard for brokers?
“Reg BI incorporates, but goes beyond suitability in that it covers disclosure, care and conflict obligations,” Blass said. “The care obligation, for example, would for the first time explicitly impose a best interest standard for recommendations.”
According to Blass, such obligations are key enhancements that brokers cannot satisfy by disclosure alone; they place greater emphasis on the importance of costs and financial incentives paid to brokers and can be directly enforced by the SEC for the first time.
Under the proposal, brokers and their firms would be required to have “a reasonable basis to believe, based on [their] diligence and an understanding of the risks and rewards of a recommendation, and in light of the retail customer’s investment profile, that the recommendation is in the best interest of the retail customer and does not place the broker-dealer’s interest ahead of the customer’s interest.”
The SEC says in the proposal that firms and brokers must consider factors such as a product’s costs, its investment objectives and the characteristics associated with a product or strategy (including its liquidity, risks, potential benefits, volatility and likely performance in a variety of market and economic conditions), as well as the financial benefits and other benefits to the broker-dealer.
“Is there room for improvement?” Blass asked. “That is exactly what we want the public to help answer. We want investors, together with consumer groups and the financial professionals who serve them, to help us get it right.”
Comments on the proposal are due to the SEC by July 14. Blass said the agency is also planning to hold several investor town halls to get consumer feedback.
Reg BI is one of three proposals the agency proposed to increase investor protections and reduce conflicts of interest last month. The other proposals concern “relationship” disclosures for investors and an interpretation of investment advisor standards.